ECN 313 - Midterm 2 Review

Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2003 to 2005 was a period of:

a booming economy.

In the late 1970s, the United States experienced a productivity slowdown that decreased the marginal product capital. This caused:

a leftward shift of the IS curve.

In the IS curve Y=a-b(R-r), the term is called:

an aggregate demand shock.

If current output is Y= $12 billion and potential output Y= $11.25 billion, then the economy is in a ________ and Y is about ________ percent.

boom; 6.7

Consider Figure 13.1. If there is a positive aggregate demand shock and inflation remains constant, the economy would move from point e to point:

c

In Figure 11.4, the economy is in its long-run equilibrium at point:

c

Consider Figure 12.2. If housing prices drop sharply, there is a loss in consumer and investor confidence and the economy moves from point ________. To prevent a ________, the Fed ________, and the economy moves from point ________.

d to c; recession; lowers interest rates; c to b

Consider Figure 13.2. The aggregate demand curve ________ displays a relatively aggressive monetary policy, while the curve ________ displays a monetary policy completely unresponsive to changes in inflation.

AD2 ; AD3

Which of the following shifts the aggregate supply curve?

All of these answers are correct.

Starting at any equilibrium in Figure 12.12, if individuals want to hold more wealth in savings, the money market would move from point:

B to D

Consider Figure 13.1. Holding the inflation rate constant, beginning at point e, if there is an aggregate demand shock, the AD curve shifts:

Not enough information is given.

Suppose we assume that initially a=0, b=1, R=r=5% if a rises 2 percent and the real interest rate rises 2 percent, short-run output:

does not change.

Which of the following is the mission of the Federal Reserve Bank? i. Preserve price stability ii. Foster economic growth and employment iii. Promote a stable financial system

i, ii, and iii

When a central bank targets interest rates, it adopts a policy to adjust ________ to accommodate ________.

money supply; money demand shocks

In the IS curve, consumption, government expenditure, exports, and imports are a function of:

potential output.

You are a staff economist with the Federal Reserve. The chairman says to you, "The rate of change in inflation is too high, and I think the Phillips curve is horizontal. What should we do to reduce these inflationary increases?" How do you respond?

"Because the Phillips curve is flat, we can do nothing to change the rate of inflation, as it does not respond to changes in output."

You are a staff economist with the Federal Reserve. The chairman says to you, "The rate of change in inflation is too high, and I don't think the Phillips curve is very steep. What should we do to reduce these inflationary increases?" How do you respond?

"Because the Phillips curve is relatively flat, we need to increase interest rates a lot, as the change in inflation is not very responsive to changes in output."

According to the text, the slope of the Phillips curve in the United States is about ________. Thus, if the gap is 6 percent, the change in inflation would be ________ percent.

1/3; 2

Based on the data presented in Figure 9.3, which of the following periods is/are likely (a) recession(s)?

1983, 1990, and 2001

Consider the monetary rule R-r=0.25(PIE - PIE) . If the inflation rate is 4 percent, the marginal product of capital is 2 percent, and the target rate of inflation is 3 percent, then the real interest rate should be ________ percent.

2.25

When the U.S. economy bottomed out during the Great Depression, the unemployment rate hit about ________ percent in ________.

25; 1933

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 3 percent, according to Okun's law, Y is ________ percent.

4

If the current rate of inflation is 3 percent, using the values suggested by Professor Taylor, r=2%, PIE=2%, m=1/2%, the monetary policy rule predicts a nominal interest rate of ________ percent.

5.5

Consider Figure 11.7 of the life-cycle hypothesis. Area(s) ________ is/are (a) period(s) of ________, and area(s) ________ is/are (a) period(s) of ________.

A; borrowing; C; dissaving

If the government gives firms a temporary investment tax credit:

All of these answers are correct.

Starting at any equilibrium in Figure 12.12, if the Fed tightens money, the money market would move from point:

B to C

Consider two economies with the following IS curves, denoted 1 and 2: IS1: Y=a-b1(R-r) IS2: Y2=a-b2(R-r) Given these two curves, the economies are identical except that they respond to interest rate changes differently. Suppose we assume a=0, b=1, b2=0.5, R=r=5%. If the real interest rate in each economy falls to R=4% then:

Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential.

Consider Figure 13.2. Each of the aggregate demand curves pictured represents a different economy. In which economy is the central bank most concerned with inflation?

Economy 2

Consider Figure 11.1. What explains the difference in the volatility of each series?

Households base their consumption on permanent income.

Consider Figure 11.3. If investment is interest rate insensitive, the economy would be characterized by:

IS3.

Consider the IS curve in Figure 11.6. If the interest rate decreases and there is a negative aggregate demand shock, the economy will move to point:

Not enough information is given.

If m = 0.5 in the simple monetary rule and the inflation rate is 2 percent below the target inflation rate, the Federal Reserve will:

Not enough information is given.

A change in which of the following parameters would cause a movement along the AD curve Y=a-bm(PIE - PIE)?

PIEt

Some economists, like Robert Barro and John Taylor, were skeptical about the effectiveness of the American Recovery and Reinvestment Act and cited ________ as the reason.

Ricardian equivalence

One hypothesis for the lack of success of the rapid fiscal expansion in Japan financed by increased borrowing in the 1990s to prevent a sharp economic downturn is:

Ricardian equivalence.

The term structure of interest rates shows the relationship between:

U.S. Treasury bills with different maturities.

Relatively recently, Toyota took over the position of the world's largest automobile manufacturer from General Motors (GM). This is an example of ________ in the United States.

a negative aggregate demand shock

If m is relatively high, monetary policy is relatively ________ and the AD curve is ________.

aggressive; relatively flat

Under rational expectations, people use ________ to make their best forecasts of the coming rate of inflation.

all the information at their disposal

In 1979, the inflation rate reached about 14 percent, due in part to ________. The Board of Governors of the Federal Reserve under ________ decided to ________ interest rates, sending the economy into a ________.

an increase in oil prices; Volcker; raise; recession

Considering Figure 9.1:

area a is where current output is greater than potential output, and area b is where current output is less than potential output.

If , Y=0 the macroeconomy is:

at its potential level of output.

Consider the Phillips curve at Y=0 in Figure 9.4. The economy is:

at its potential output.

Consider Figure 13.4. Nigerian rebels taking over privately owned oil wells would cause the economy to initially move from point ________ to point ________.

b; c

Consider the IS curve in Figure 11.6. If there is a positive aggregate demand shock and interest rates remain constant, the economy will move from point e to point:

c.

The short-run model determines ________ and ________.

current output; current inflation

Consider Figure 12.2. If the Fed lowers interest rates and there are no aggregate demand shocks, the economy moves from point ________ to ________.

d; a

According to the Phillips curve presented in the text, a negative macroeconomic shock:

decreases the rate of inflation.

Once a ________ is chosen, the main tool the Federal Reserve uses to change the money supply is ________.

federal funds rate; open-market operations

The ultimate goal of macroeconomic policy is:

full employment; output at potential; and low, stable inflation.

Consider Figure 13.1. If Europe goes into a recession and inflation remains constant, the economy would move from point e to point:

g

If nominal interest rates are high, you:

hold less cash and more savings.

You are given the data in Table 11.1, which covers the period 1970-2015. "Mean" is the average growth over the period and "St Dev" is the standard deviation of the growth (a measure of volatility) of real output, consumption, investment, and government expenditures. From this information, you conclude that:

households smooth their consumption more than other sectors.

Which of the following is the mission of the Federal Reserve Bank? i. Preserve price stability ii. Foster stable fiscal policy iii. Ensure taxes are fair

i only

Which of the following is an example of an IS shock? i. A change in interest rates ii. A change in tax policy iii. A natural disaster iv. A change in the price of oil

ii and iii

If , Y < 0 the macroeconomy is:

in a recessionary gap.

Consider the Phillips curve at Yt2 in Figure 9.4. The economy is:

in recessionary gap.

According to the Phillips curve presented in the text, a positive macroeconomic shock:

increases the rate of inflation.

An increase in the interest rate by the Federal Reserve will affect only real interest rates because:

inflation is sticky in the short run.

According to the Phillips curve, if the:

inflation rate is rising, the economy is booming.

According to the Phillips curve, if current output is above potential output:

inflation rises.

In most advanced economies, central banks target ________ to conduct monetary policy.

interest rates

In the equation I/Y=a-b(R-r) , if b is close to zero, investment:

is not very sensitive to real interest rate changes.

One of the remarkable things about the 2001 recession was the:

jobless recovery.

In a weakening economy, you might expect producers to:

lower prices to increase quantity demand for their output.

Suppose we assume a=0, b=1, R=r=5%, and the real interest rate rises to R=6% . In this scenario of the IS curve, the economy would, in the short run:

move from its long-run equilibrium to 1 percent below its potential.

If the central bank reduces the money supply, the:

nominal interest rate rises and individuals hold less money.

The permanent-income hypothesis suggests that people will base their consumption on their:

permanent incomes more than their temporary incomes.

Which of the following is NOT an example of a short-term macroeconomic shock?

planned investment expenditures

Consider Figure 12.2. If the Fed raises interest rates and there are no aggregate demand shocks, the economy moves from:

point b to c

The long-run model determines ________ output and ________.

potential; long-run inflation

In the Phillips curve, PIE=vY+c , if v is large, then:

price-setting behavior is very sensitive to short-run fluctuations.

If current output is billion and potential output billion, then the economy is in a ________ and is about ________ percent.

recessionary gap; −4.7

Suppose an economy exhibits a large unexpected decrease in productivity growth that lasts for a decade; however, monetary policymakers are slow to recognize that the change is to potential—not current—output, and they interpret the decrease in output as a recession that leads current to fall below potential output. In this scenario, policymakers believe that ________ pressures are building and incorrectly respond by ________ interest rates, sending the economy into a(n) ________ gap.

recessionary; reducing; inflationary

According to the life-cycle and permanent-income hypotheses, if future income rises permanently, current consumption:

rises.

The basic IS model embodies the life-cycle and permanent-income hypotheses by:

setting consumption proportional to potential output.

You hear that the Federal Reserve is raising interest rates. From this new information, you conclude that:

short-run output will fall along the IS curve, possibly pushing the economy toward recession.

Over the past few years, the Chinese have bought billions of dollars of U.S. bonds, pushing down U.S. interest rates. From this, you conclude that:

short-run output will rise along the IS curve, possibly pushing the economy toward expansion.

Taxes, oil price changes, government spending, interest rate changes, new technologies, and disasters are examples of:

short-term economic shocks.

According to the Phillips curve, short-term changes in inflation are due to changes in:

short-term output fluctuations.

An inverted yield curve is usually the result of:

the Fed fighting inflation.

What is the best definition of the short term in the short-term model?

the length of time for short-term deviations to return to their long-run values

Output fluctuations are defined as:

the percentage difference between current output and potential output.

Consider the following model of the IS curve without an international sector: Consumption: C=aY Investment: I=aY and Government expenditure: G=aY With this formulation the IS curve is:

vertical.

If the central bank is targeting the money supply, the money supply is ________ and ________ with respect to the nominal interest rate.

whatever level is dictated by the central bank; is vertical

Between 2009 and 2015, the federal funds rate was roughly equal to:

zero

Suppose a=0.60, ai=0.20, ag=0/10, aex=0.10, and aex=0.20. For any given R,a equals ________ and the economy ________.

−0.10; has experienced a negative aggregate demand shock

Since 1950, economic fluctuations in the United States (i.e., the output gap) have generally been in the ________ percent to ________ percent range.

−4; 4